What option strategy does Warren Buffet use?

For selling put options, Buffett says that strong "It's only the price on the final day that counts."

One of Warren Buffett's favorite trading tactics is selling put options.


He loves to find assets that he thinks are undervalued and agrees to own them at even lower prices. In the interim, he collects option premium today which should the asset go lower in price it also helps reduce his cost basis

Warren Buffet called Options 'Weapons of Mass Destruction'

Warren Buffet uses idle cash to deploy Options to earn additional income on his existing portfolio

Today, you will learn how to deploy options on Stock portfolio to earn additional returns

We call this strategy 'The Options Wheel Strategy' which is a combination of investing & trading.

Who is this for optiion wheel strategy

• Long Term Investor
• Homemaker
• Part-time Trader
• Retired Person
• Anyone interested in generating passive income
• Wants to buy stocks at lower prices
• People who want to earn additional returns on existing stocks they have
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MUST KNOW

Options Wheel Strategy can be run only F&O Stock and you have to ready to buy Lot for the particulars company if CSP goes in the money

(Find out Lot of stock you can check on VIRTUAL FLAT )

What Is the Options Wheel Strategy?

The Wheel Definition: In options trading, the "Wheel" is 4 step strategy that first involves selling a put option. If/when this put is assigned, you will be long stock. The next step is to sell a call option against this stock. If the underlying rises in prices, you will be "called out" on the stock, resulting in a flat position. Repeating this process creates "the wheel".

The wheel strategy is a great, long-term options trading strategy best suited for traders looking to generate income. In this article, we will review step-by-step how this income strategy profits.

takeaways

• The wheel strategy involves selling a cash-secured put, purchasing stock when/if the put is assigned and then selling a call against this long stock.

• Both the put and call sold are ideally out-of-the-money.

The wheel options strategy works best in minorly bullish markets; in very bullish markets, owning the stock outright will be more advantageous


What Is the Options Wheel Strategy?

The wheel involves a multi-step, systemic process:

1. Sell cash-secured puts on a stock you want to eventually own.

2. When the stock falls below your short put strike price on the expiration date, your short put will be assigned and converted into long stock.

3. Once in possession of the long stock, sell an out-of-the-money call on this stock.

4. If/when the stock rallies to the short call strike price on expiration, you will be called out, or “assigned,” leaving you with a flat position.

5. Re-enter the short put position on the same or another stock.

What Is A Cash-Secured Put?

Cash-Secured Put Definition: In options trading, a “cash-secured put” is a short put option that is backed with the full cash amount needed to buy the shares at the strike price. This strategy is both neutral and bullish on the underlying.

Cash-Secured Put Maximum Profit: Premium received from selling put.

Cash-Secured Put Maximum Loss: Strike price minus the premium received

What Is A Covered Call??

Covered Call Definition: In options trading, a covered call position is established when an out-of-the-money call option is sold against 100 shares of long stock.

Covered Call Maximum Profit: Strike price of the short call option minus the purchase price of the underlying stock plus the premium received.

Covered Call Maximum Loss: Stock price minus option premium received.

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The Wheel And Strike Prices: Which Options To Choose?

In order to be a successful options trader, you must understand the risks.

Having a fundamental understanding of "The Greeks" will help you accomplish this.

Delta is the option Greek that tells us how much an option price is expected to move based on a $1 change in the underlying stock.

This Greek also tells us the probability an option has of expiring in-the-money (ITM).

An options chain can be arranged by the Greek. When choosing your option contract strike prices for both cash-secured puts and covered calls, it is therefore very important to take this metric into consideration when choosing your strike prices for the wheel.

The Wheel Options Strategy FAQs

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How do you choose stock for wheel strategy?

When choosing stocks for the wheel strategy, there are several factors to consider.

If you have a limited amount of capital to work with, it may be wiser to stick with cheap stocks.

Implied volatility is also important in this strategy. The higher the implied volatility, the higher the odds the stock will breach both the short put and short call strike price.

Is the wheel strategy profitable?

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The wheel options trading strategy is most profitable (when compared to simply buying the stock) when the underlying stock is minorly bullish.

If the stock goes up too much, the wheel strategy will lose money when compared to owning the stock outright.

Income Streams

Cash Secured Put - collect premium from selling puts

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Covered Calls - collect premium from selling calls

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Stocks - collect profit by selling stock when it hits the Covered Call Strike at Expiry.

Choosing the Group of Stocks for the Strategy

Low Volatility Stocks - stocks which rise slowly & steadily

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Large Cap Stocks - stick to large cap & blue-chip stocks which are unlikely to go bust.

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Avoid High Growth Stocks- Highly volatile and frequent exits from strategy.

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Optionable - Stocks with liquid options

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Eg: INFY, TCS, RELIANCE, MARUTI, ITC, HINDUNILVR, ESCORTS, HEROMOTOCO, HDFCBANK, ICICIBANK

When to start the Strategy

# When the stock of your choice reaches your desirable price .

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# Support at previous major breakout levels

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# Support at major moving averages like 50/100/200SMA

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# Other technical signals that you are comfortable with.

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Capital Requirement for the Strategy = > 3-7 lakhs per stock

PROS

# Additional returns on stocks in your portfolio in 4 different ways .

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#Reduces the holding price of the stock over the years if executed diligently

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# Support at major moving averages like 50/100/200SMA

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# eventually holding it becomes free

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CONS

# Capital intensive .

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#Fear of missing out (FOMO) on multi-baggers

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